If a corporation buys stock of another corporation, it normally gets a carryover basis in the target’s assets. But under § 338, the buyer can elect to treat the stock purchase as an asset purchase – the target is treated as selling all its assets at fair market value (triggering corporate‑level gain) and then as a new corporation with a stepped‑up basis.
Why would a buyer want to make a § 338 election? If the target’s assets have low basis, the buyer can get higher depreciation deductions, but at the cost of immediate tax on the target’s built‑in gain. So the election makes sense when the target has NOLs or other tax attributes that can offset the gain.
Section 338 applies to a “qualified stock purchase” – the acquisition of at least 80% of the target’s stock by vote and value within a 12‑month period. § 338(d)(3). The election is made by the buyer by the 15th day of the 9th month after the acquisition date. § 338(g)(1).
The “aggregate deemed sale price” (ADSP) is the amount for which the target is deemed to sell its assets. The “adjusted grossed‑up basis” (AGUB) is the buyer’s basis in the target’s assets after the election. These are determined by rules that gross up the purchase price of the recently purchased stock.
Section 338(h)(10) provides a special election for sales of stock of a subsidiary within a consolidated group, or of an S corporation. Under a § 338(h)(10) election, the target is treated as a member of the selling group, the sale is treated as an asset sale, but no gain or loss is recognized by the selling group on the stock sale. This results in only one level of tax – the target pays tax on the deemed asset sale, but the selling parent doesn’t pay tax on the stock sale. This is often the best of both worlds.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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